Tennessee Medicaid Block Grant Proposal Will Test CMS Policy

On September 17, Tennessee unveiled for public comment a draft waiver proposal seeking federal approval to amend its long-standing Section 1115 demonstration by applying a block grant financing model to its Medicaid program (called “TennCare”). Earlier this year, the Tennessee legislature directed Governor Bill Lee (R) to submit a block grant proposal. The legislation includes some policies that may go beyond what the Centers for Medicare & Medicaid Services (CMS) is willing to approve, even recognizing the Trump Administration’s interest in working with states to authorize Medicaid block grant financing. The state will accept comments on the proposal through October 18, at which point Tennessee will finalize the proposal and submit it to CMS, likely by November 20, the deadline set by state law. The waiver request will then be subject to another 30-day public comment period at the federal level.

Tennessee’s Request for “Block Grant” Financing. Medicaid is structured as a “matching” program, with a federal match rate that varies by state. The federal and state governments share in the cost of all authorized program expenditures, with no cap on the total amount of the federal contribution. Tennessee seeks to replace this financing structure with an annual lump-sum federal payment for much of its Medicaid program.

Tennessee estimates a federal block grant of $7.9 billion for the first year of the demonstration, based on spending for 2016–2018 derived from the state’s current waiver calculations (more on this below). That amount would be adjusted each year using a trend factor based on the Congressional Budget Office’s projection of Medicaid spending growth. It might also be adjusted upward based on enrollment growth. Notably, these federal dollars would no longer be paid as a match to state Medicaid spending based on actual state costs; instead, they would be paid in full each year as long as the state satisfies a “maintenance of effort” (MOE) requirement tied to current state spending levels, trended forward like the block grant itself. Although Section 1115 authorizes waivers of many provisions of federal law, it does not authorize CMS to waive the Medicaid matching structure or the match rate itself.

In addition to the elimination of the matching structure, other features of Tennessee’s proposed financing model may give CMS pause. A block grant typically shifts financial risk to the state for both increased enrollment and rising per capita costs in exchange for new programmatic flexibility. Tennessee’s proposal seeks broad programmatic flexibility while minimizing its financial risks:

• The block grant amount would represent a floor, not a ceiling; the annual block grant payment would be adjusted upward if enrollment grows past the baseline calculation. No adjustment would be made if enrollment falls.
• Instead of calculating the block grant payment based on recent TennCare spending, Tennessee is proposing to set the payment using historic TennCare waiver calculations and projections of what spending would have been if the state had not implemented TennCare. Tennessee’s actual spending has been significantly lower. The higher baseline would boost the block grant payment.
• While the Administration is interested in reducing federal Medicaid expenditures, the trend rate proposed by Tennessee would be more generous than the typical “budget neutrality” model for 1115 waivers, and far more generous than the capped funding trend rates proposed in the 2017 Affordable Care Act (ACA) “repeal and replace” bills.

Another significant financing provision is Tennessee’s request for authority to divert block grant funds to other health-related programs. If Tennessee does not spend the entire block grant in a given year, the state would retain 50% of the unused federal funds as a “shared savings” payment, which could be used on TennCare services carved out of the block grant or health-related initiatives outside the Medicaid program. The proposal appears to allow the state to replace existing state funding for carved-out services or health-related programs, freeing up those dollars for other purposes unrelated to health.

Populations and Services Included in the Block Grant. Tennessee, which has not expanded Medicaid under the ACA, seeks to apply the block grant to what it describes as its “core” Medicaid populations: low-income children, parents, pregnant women, and people who are elderly, blind or disabled. This focus is out of step with CMS’s recent history with respect to new waiver features (such as work requirements), which have been approved mostly with respect to non-elderly, non-disabled adults (such as the ACA expansion population). The proposed block grant would cover most TennCare services but would carve out certain high-cost spending areas, including prescription drug benefits, supplemental payments for hospitals, services provided to TennCare beneficiaries who are also enrolled in Medicare, and home- and community-based services under Section 1915(c) waivers. Even so, Tennessee requests new leeway to administer some of these benefits and payments.

Other Key Features of Tennessee’s Request

• Broadened Expenditure Authority. The state seeks authority to spend block grant funds (and presumably the state funds that satisfy the MOE requirement) on items and services that are not currently eligible for federal TennCare funding. It does so by seeking to expand what counts as a Medicaid expenditure under TennCare and, as noted above, by requesting authority to divert block grant funds to other programs. The proposal notes that these new spending areas could include services for Medicaid beneficiaries beyond those that can be covered under Medicaid (such as housing supports and other services related to the social determinants of health), and also on health-related spending that is not specific to TennCare beneficiaries (such as technology supports for rural providers). Beyond the few examples listed in the proposal, the state requests broad authority to make its own decisions on the initiatives that would qualify for block grant funding. Given that the federal funding would be capped, any expenditures on new initiatives could result in less spending on traditional Medicaid services.
• Programmatic Changes. In addition to broadened expenditure authority, Tennessee requests the ability to make the following changes to its Medicaid benefit package:
   
  • Modify the TennCare benefit package without the need for CMS approval, whether by adding or removing optional benefits or by changing the scope of mandatory benefits;
  • Establish a closed prescription drug formulary and also exclude new drugs from the formulary until certain conditions are met;¹ and
  • Establish different benefits packages for different groups of adults or implement small-scale tests of new benefits.²
• Reduced Federal Oversight. Tennessee seeks the ability to modify, without prior federal approval, beneficiary enrollment processes, hospital supplemental payments, and managed care organization (MCO) contracts and rates (including certification of actuarial soundness). In addition, Tennessee seeks an exemption from the requirement to regularly report to CMS about MCO performance.

Moving Forward. A few states other than Tennessee have been considering block grant waiver proposals, and it has been reported that the Administration is developing guidance that would invite states to apply for block grant waivers. Whether Tennessee’s proposal is consistent with the Administration’s vision for Medicaid financing remains to be seen.

What is clear is that Tennessee’s proposal will test CMS’s view of the limits of its authority under Section 1115, as well as the Administration’s willingness to spend federal dollars to shield states from some of the financial risk associated with a block grant; to allow the state to use capped Medicaid funds for other purposes, potentially supplanting state funding with federal funding; and to reduce its oversight of program expenditures and future state program changes. Given the unprecedented nature of the request and the potential impact on beneficiaries and the Medicaid program, the waiver will be of keen interest not just in Tennessee but nationwide.

_{¹ Tennessee’s existing 1115 waiver authorizes the state to establish a preferred TennCare drug list and to negotiate supplemental rebates with manufacturers; drugs off the list are subject to prior authorization. This proposal would go further by allowing the state to deny coverage for drugs unless a manufacturer offered a rebate at a level acceptable to the state.}

_{² Tennessee has not asked CMS to waive any requirements pertaining to Early and Periodic Screening, Diagnostic and Treatment (EPSDT), a mandatory benefit package for children under age 21.}